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There are two choices: reduce or eliminate interest deductibility or introduce some deduction for equity.
Neither seems particularly feasible for some time. Reducing the deductibility would be elegant but generate screams of bloody murder from corporate America.
Making dividend payments tax deductible, which would start to level the playing field, might be easier and more popular. Of course, that would reduce revenue to the government and have to be made up somehow, though tax increases elsewhere or decreased services.
Mr. Fleischer suggests that one way to limit the distortion would be to eliminate the deduction to the extent a financial institution exceeds a ratio of debt-to-equity of 5 to 1. If a bank has borrowed $6 for every $1 in stock, then it doesn't get to deduct the interest payments on that extra dollar of debt. That would make debt more expensive and make banks less inclined to borrow as much.
And it would help stop banks from being moochers.